Old Navy to Split From Gap Inc.
Gap Inc. yesterday announced plans to create two independent, publicly traded companies: Old Navy and a yet-to-be-named company ("NewCo") that will consist of the Gap brand, Athleta, Banana Republic, Intermix and Hill City. Gap said the spin-off will enable each company to maximize focus and flexibility, align investments and incentives to meet its unique business needs, and optimize its cost structure to deliver profitable growth. Robert Fisher, chairman of the Gap's board of directors, said in a statement that after a comprehensive review by the board it's clear "Old Navy’s business model and customers have increasingly diverged from our specialty brands over time, and each company now requires a different strategy to thrive moving forward. Recognizing that, we determined that pursuing a separation is the most compelling path forward for our brands — creating two separate companies with distinct financial profiles, tailored operating priorities and unique capital allocation strategies, both well positioned to achieve their strategic goals and create significant value for our customers, employees and shareholders.”
NewCo, which will be led by Art Peck, current president and CEO of Gap Inc., has $9 billion in annual revenue and a strong balance sheet. Old Navy, with $8 billion in revenue, will be led by Sonia Syngal, who is currently president and CEO of the Old Navy brand. NewCo will be based in Gap’s current headquarters and Old Navy will remain at its current headquarters, both located in San Francisco. It expects to finish splitting the companies in 2020.
Also on Thursday, Gap Inc. said it will close 230 Gap stores over the next two years as part of its plan to "revitalize" the Gap brand. About 130 of those closures will happen this year. The company plans to open Old Navy and Athleta locations. Gap Inc. believes it will save between $250 million and $300 million before taxes over the next two years because of its closure plans, according to a securities filing.
Total Retail's Take: The separation announced yesterday reflects the tales of two vastly different businesses. Old Navy has been a bright spot for Gap Inc. as its budget apparel has made it more attractive to a broader base of customers. The Gap brand, however, has struggled in the face of competition from fast-fashion retailers and changing trends. It fell out of favor with baby boomers who grew up on the brand, and it failed to attract millennials, who drive fashion trends today. While the move makes sense for Old Navy to capitalize on its scale, customer awareness and positioning to deliver profitable growth as an independent company, retail analysts are questioning the future for NewCo. There's risk involved in grouping promising brands like Athleta and Hill City with the struggling Gap brand, ultimately driving profitability to Gap by leaning on them. According to Peck, embedding the capabilities Gap Inc. has been focusing on for years — expanding its omnichannel customer experience, building out its digital capabilities and improving its operational efficiencies — into "two stand-alone companies, each with a sharpened strategic focus and tailored operating structure" will position both companies "to capitalize on their respective opportunities and act decisively in an evolving retail environment.”
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